The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

As discussed in a prior post (here), the U.K Bribery Act of 2010 is now set to take effect on July 1, 2011. In a guest post below, Anjali Das, a partner in the Chicago office of the Wilson Elser law firm, takes a look at the Act’s key provisions and requirements and then reviews the Act’s D&O insurance implications. 

My thanks to Anjali for her willingness to publish her article as a guest post here.  I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly,

Anajli’s guest post follows:

            As if companies and their directors and officers did not have enough to contend with in the wake of the global financial crisis and the U.S. government's increasingly zealous prosecution of violations of the Foreign Corrupt Practices Act ("FCPA"), they will soon have to comply with the U.K. Bribery Act of 2010 ("Bribery Act") effective July 1, 2011, which far surpasses the FCPA in terms of potential liability exposure for bribery in the broadest sense of the word. In light of the potential long-arm reach of the Bribery Act, Directors and Officers ("D&O") liability carriers should familiarize themselves with the potential increased exposure to their insureds under the Bribery Act.

            This article discusses the following the issues related to the Bribery Act:

• Four key bribery offenses under the Act: 

• Imputation of bribery offenses by associated persons to the company;

• Six guiding principles for implementing effective anti-bribery policies and procedures;

• Potential coverage issues under D&O policies for investigations and proceedings under the Act

PART I: Overview of the Bribery Act

            On March 30, 2011, the U.K. Ministry of Justice ("MOJ") issued long-anticipated Guidance on the Bribery Act which provides an overview of the four key offenses under the statute and six guiding principles to prevent bribery in violation of the Act.

 Four Key Offenses Under the Act

            As discussed below, the key offenses under the Bribery Act include: (i) active bribery or offering bribes (Section 1), (ii) passive bribery or accepting bribes (Section 2), (iii) bribery of a foreign public official (Section 6), and (iv) a company's failure to prevent bribery (Section 7).  

            Sections 1, 2 and 6 apply with respect to acts of bribery that take place in the U.K. or if the person committing the offense has a "close connection" to the U.K such as a British citizen, resident of the U.K., or entity incorporated under the laws of any part of the U.K. A company may also be liable under Sections 1, 2 or 6 if the offense was committed by or with the consent of a company's senior officer. Section 7 applies to companies that are incorporated or formed in the U.K. or "carry on business" in the U.K., regardless of whether the bribery occurred in the U.K. or elsewhere. 

            Active and Passive Bribery: Section 1 of the Bribery Act prohibits "active bribery" and makes it an offense for a person to offer, promise, or give "financial or other advantage" to another person with the intent to induce "improper performance" of a relevant function or activity. Section 2 of the Bribery Act is the flip side of Section 1 and prohibits "passive bribery".   Section 2 makes it an offense for a person to accept or receive a financial or other advantage intended to induce or reward improper performance by the recipient or some other person. According to the MOJ's Guidance, improper performance means "performance which amounts to a breach of an expectation that a person will act in good faith, impartially, or in accordance with a position of trust." 

            In the introduction to the MOJ's Guidance, Kenneth Clarke, U.K. Secretary State for Justice, seeks to assuage businesses that the parameters of the Act are not intended to prohibit reasonable client development activities: "Rest assured, -- no one wants to stop firms getting to know their clients by taking them to events like Wimbledon or the Grand Prix." Moreover, the Guidance itself suggests that "an invitation to attend a Six Nations match at Twickenham as part of a public relations exercise designed to cement good relations or enhance knowledge in the organisation's field is extremely unlikely to engage section 1. . . ." However, more lavish hospitality intended as a quid pro quo to induce favorable treatment in a pending business deal (i.e., to get new business, keep business, or get some other business advantage) could be subject to greater scrutiny under the Act. The test is what a "reasonable person" in the U.K. would expect under the circumstances, and whether the prosecution can demonstrate evidence of intent to induce improper performance as defined by the Act.

            Bribery of Foreign Officials: Section 6 of the Bribery Act, which resembles the anti-bribery provisions in the FCPA, prohibits the bribery of a foreign public official. As explained in the MOJ's Guidance, an offense is committed when a person offers, promises or gives a foreign public official a financial or other advantage with the intent of: (i) influencing the official in the performance of his or her official duties, and (ii) obtaining or retaining business or other advantage in the conduct of business by offering the bribe. A foreign official includes any person who performs public functions in any branch of national, local, or municipal government in any country or territory outside the U.K.   An example in the MOJ's Guidance of a permissible transaction with foreign officials is a U.K. mining company's offer to pay for reasonable travel and accommodation to enable the foreign officials to inspect the standard and safety of the company's distant mining operations. In contrast, an offer to pay the foreign officials' "five-star holiday" in an unrelated destination is questionable. 

            Failure to Prevent Bribery :Section 7 of the Bribery Act creates a new offense for corporate liability for failing to prevent bribery in the first instance. Under this section of the Act, a company will be liable if a person associated with it bribes another person with the intention of obtaining or retaining business or other advantage. Liability under this section applies to "relevant commercial organizations" which include: (1) entities incorporated or formed in the U.K., regardless of whether the entity conducts business in the U.K., and (2) entities that "carry on business" in the U.K., regardless of the place of incorporation or formation. The Act itself does not define the term "carry on business," and the MOJ's Guidance merely states that this interpretation is subject to a "common sense approach". While the MOJ notes that the courts are the final arbiter of this determination, the Government itself does not expect that companies merely listed on the London Stock Exchange without a "demonstrable business presence" in the U.K. are subject to liability under Section 7 of the Act. 

 Imputation of Acts by Associated Persons

            Corporate liability under Section 7 of the Act may be established through bribery conducted by "associated persons" which broadly encompasses any person or entity that "performs services" for the company. An associated person may include the company's employees, agents, subsidiaries, or any other party that performs services for or on behalf of the company regardless of the "capacity" in which such services are performed. Significantly, this may include the company's suppliers (that do more than merely sell goods) and direct contractors (as opposed to sub-contractors). As a result, there is an increased burden on companies to examine their supply chain and external business relationships with third parties for potential risk of bribery and imputation of corporate liability under the Act.

 Ministry of Justice's Six Guiding Principles

            The MOJ has identified six "guiding principles" to assist companies in adopting effective policies, and procedures to prevent bribery. If a company can demonstrate that it has adequate anti-bribery procedures in place, this could be a complete defense to violation of Section 7 of the Bribery Act. These guiding principles include:

(1) Proportionality: The company's anti-bribery policies and procedures should be "proportionate" to the size of the company and the perceived risks it faces. The procedures should be designed to mitigate identified risks and prevent deliberate unethical conduct on the part of associated persons.

(2) Top Level Commitment: The message of zero tolerance for bribery should be adopted, implemented, and/or communicated by individuals at the highest levels of the organization such as the board of directors.

(3) Risk Assessment: The company should periodically assess and document its perceived exposure to internal and external risks of bribery, including an analysis of bribery risk in the markets in which it conducts business (for country risk, sector risk, transaction risk, and business opportunity risk) and risk presented by various business partners/associates.

(4) Due Diligence: The company should conduct appropriate due diligence either internally or by external consultants prior to hiring and engaging other persons, third party intermediaries, agents, or business partners/associates to represent the company in its business dealings.

(5) Commmunication: The company's anti-bribery policies and procedures should be communicated internally to staff and employees and externally to all business partners/associates that perform services for the company. Such communications may be made orally, in writing, and/or through training sessions.

(6)    Monitoring and Review: The company should periodically evaluate its anti-bribery policies and procedures for effectiveness in light of changing business or political environments that may increase the company's bribery risk in certain markets. These periodic reviews may be conducted through special internal systems such as internal financial control mechanisms, staff surveys, formal reviews by top-level management, and/or external verification of the effectiveness of the company's anti-bribery procedures. 

            It is important to recognize that the MOJ's guidelines for anti-bribery policies and procedures are not "prescriptive," and there is no "one- size-fits-all" approach that applies to all companies. 

PART II:     Potential Coverage Issues Under D&O Policies 

            These days, D&O policies routinely afford "worldwide" coverage, including coverage for foreign (non U.S.) proceedings against a company's foreign subsidiaries and directors and officers of these subsidiaries.   Therefore, U.S. companies that do business in the U.K., have subsidiaries, directors and officers, employees or agents in the U.K. may be subject to violations of the Bribery Act. As such, D&O insurers would be well-advised to consider the potential coverage implications under their policies for claims and investigations under the Bribery Act.

            Potential coverage issues that might arise under D&O policies for Bribery Act violations, investigations and proceedings include, but are not necessarily limited to:

·        Coverage for investigations

·        Covered claims against a D&O versus uncovered claims against the company

·        Allocation of defense costs

·        Insured subsidiaries and their directors and officers

·        Coverage for collateral litigation arising from Bribery Act violations

·        Dishonesty and Personal Profit Exclusions

·        Coverage for fines and penalties

 Coverage for Investigations

            Initially, it is important to consider whether a government investigation for potential violations of the Bribery Act gives rise to an insurer's obligation to pay or advance the insured's legal fees and expenses under a D&O policy. Like FCPA investigations, investigation costs for Bribery Act violations could be substantial – potentially exceeding millions of dollars. Consider for example the ongoing FCPA investigation of Avon Products, Inc. where the company reportedly spent $96 million in 2010 and $35 million in 2009 for legal fees related to its FCPA investigation. 

            Coverage for investigations under D&O policies has evolved dramatically in recent years. In some instances, the D&O policy definition of a Claim has expanded to encompass investigations of directors and officers by various government or regulatory authorities. Some D&O policies only afford coverage for formal investigations if a director or officer is served with a "subpoena" or identified as a "target" of an investigation by a governmental investigative authority. More recently, some insurers have expanded coverage to include informal investigations of directors and officers which do not require the issuance of a subpoena.  Such informal investigations may include a voluntary request for production of documents, interviews, or testimony.  This year, for the first time, a new generation of D&O coverage affords entity coverage for investigations "of the company" itself.  However, entity coverage for investigations under these newest policies may be limited to claims for violations of securities laws and/or expressly exclude FCPA and Bribery Act claims. Thus, it is critical to analyze the specific policy wording to determine the scope of coverage for investigations. 

            Undoubtedly, there are numerous cases finding both in favor of and against coverage for investigations under D&O policies. This is a fact-sensitive analysis dictated in part by the precise policy wording and the circumstances surrounding the investigation.  

            For instance, a number of courts have held that subpoenas and/or Civil Investigative Orders issued by the SEC, DOJ, or other government authorities are covered claims under a D&O policy – particularly where the definition of a claim expressly includes an "investigative order". In MBIA, Inc. v. Federal Ins. Co., 2009 U.S. Dist. LEXIS 124335 (S.D.N.Y. 2009), the court held that subpoenas issued by the SEC and New York Attorney General ("NYAG") in connection with their investigations of MBIA constituted a Securities Claim which was defined as "a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document". The court rejected the insurer's argument that a subpoena was not an investigative "order". At a minimum, the subpoenas were "similar documents" that triggered coverage under the policies. 

            In Ace American Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789 (D. Maryland 2008), the court held that an administrative subpoena issued by the Maryland Attorney General and a Civil Investigative Demand issued by the Texas Attorney General constituted a Claim which was defined by the policy as "a civil, administrative or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document". The court also rejected the Insured's argument that the subpoena and Investigative Demand failed to allege a Wrongful Act. The court observed that the Maryland and Texas Attorney General's Office were investigating violations of their respective state Consumer Protection Acts in connection with the company's business activities. 

            In National Stock Exchange v. Federal Ins. Co., 2007 U.S. Dist. LEXIS 23876 (N.D. Ill. 2007), the court held that an SEC investigation commenced by a formal order of investigation was a Claim under the policy. In that case, the definition of a Claim included "a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document". It was undisputed that the SEC issued an order directing a private investigation and designating officers to take testimony. The court rejected the insurer's argument that the SEC investigation was not a Claim "against an Insured Person for a Wrongful Act". The court observed that the scope of the SEC's investigation included the company and its directors and officers for possible violations of securities laws. 

            In contrast, other cases have held that government investigations are not a claim under a D&O policy. In Office Depot, Inc. v. National Union Fire Ins. Co., 734 F. Supp. 2d 1304 (S.D. Fla. 2010), the court held that the D&O insurer was not liable to pay legal fees and costs incurred by the company in connection with: (1) the SEC's investigation, or (2) the company's internal investigation by its Audit Committee. First, the court opined that the SEC investigation was not a covered Securities Claim against the Company since the definition expressly excluded "an administrative or regulatory proceeding against, or investigation" of the company. Second, the court concluded that the SEC investigation was not a Claim against an Insured Person (D&O). The definition of a Claim included "a civil, criminal, administrative or regulatory, proceeding" or "investigation . . . commenced by service of a subpoena" or identifying an Insured Person in writing as the target of an investigation. Here, however, the SEC investigation was directed to the company – not to an Insured Person. The SEC's formal order of investigation did not identify any specific D&Os or any specific wrongdoing by any of the D&Os. Third, the court found that the insurer was not liable for the company's internal investigation because they were not a covered "loss" "arising from" a Claim or Securities Claim. Instead, the internal investigation, which preceded subsequent shareholder suits, was triggered by a whistleblower complaint regarding various accounting irregularities. Fourth, the court observed that the internal investigation costs did not "result solely from investigation or defense" of a covered Claim as contemplated by the policy definition of Defense Costs. The court held that the insurer was not liable for the legal fees and costs incurred by the company in response to: (i) the SEC informal inquiry, (ii) SEC formal investigation prior to the issuance of a subpoena or Wells notice on an Insured Person, or (iii) internal investigation by the Audit Committee. 

            In Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co., 2008 U.S. Dist. LEXIS 86752 (S.D.N.Y. 2008) , the court held that expenses incurred by the insured in responding to a federal grand jury investigation were not covered under the insured's D&O policy. In that case, the court opined that the investigation was not a "criminal proceeding . . . commenced by the return of an indictment, filing of a notice of charges, or similar document" as defined by the policy. The court observed that there was no claim against an individual insured, because the policy expressly stated that the individual must receive "written notice from an investigating authority specifically identifying such Insured Person as a target against whom formal charges may be commenced". 

            Of course, if prosecutors ultimately sue any directors or officers for violations of the Bribery Act, such a legal proceeding might be covered if the D&O policy broadly defines a Claim to include any civil, criminal, administrative or regulatory proceeding. On the other hand, if the company alone is the subject of a legal proceeding for violation of Section 7 of the Bribery Act, this may not constitute a covered Claim. Under many D&O policies entity coverage is limited to a Securities Claim against the company such as a lawsuit by shareholders in connection with the purchase or sale of the company's securities. Such a narrow definition of Securities Claim may not apply to a company sued for violations of the Bribery Act to the extent the bribery does not involve a violation of securities laws, does not arise out of the purchase or sale of a company's securities, or is not brought by a company's shareholders. 

Identifying the Insured

            It is also critical to determine whether an "insured" is the subject of an investigation. As noted herein, many D&O policies offer worldwide coverage for a company, its subsidiaries, and their directors and officers. However, a subsidiary is a defined term that may be limited to entities in which the company owns a specified percentage of the subsidiary's stock. Consider, for example, a company that has an overseas U.K. affiliate in which it owns 40% of the voting stock. That affiliate and its directors and officers are the subject of an investigation or proceeding for violations of the Bribery Act. However, if the D&O policy only affords coverage to subsidiaries in which the company owns 50% or more of the voting stock, then the affiliate and its directors and officers are not insureds. 

            However, if both a covered subsidiary and one of its officers are sued for violations of the Bribery Act, this could give rise to a covered claim against the subsidiary's officer and an uncovered claim against the company (assuming the policy does not afford entity coverage for investigations). In that event, the insurer may need to seek an allocation of covered defense costs (for the officer) versus uncovered defense costs (for the company). Some D&O policies contain express allocation language which state that the parties will make a reasonable effort to arrive at a fair allocation for covered versus uncovered defense costs and, in the event of a dispute, the insurer will advance those amounts which it determines are covered until the coverage dispute is ultimately resolved by negotiation, arbitration, litigation, mediation, or otherwise. 

Collateral Litigation

            It is possible that Bribery Act violations may spur collateral litigation against a company and/or its directors and officers by shareholders, employees, customers, competitors, or other third parties. By comparison, FCPA violations have prompted a number of shareholder suits in the U.S. which may give rise to a covered Securities Claim.  In addition, in the case of multinational corporations, Bribery Act investigations by U.K. authorities might provoke similar investigations or legal proceedings by foreign governments or U.S. authorities under the FCPA or other anti-bribery laws. Many D&O policies are claims made and reported policies. In other words, a claim is covered if it first made during the policy period and timely reported to the insurer. When there is a chain of bribery-related investigations or legal proceedings, potential coverage issues include the date the initial bribery claim was first made (and reported), and whether subsequent bribery claims are deemed to be related to the initial claim such that they are all covered under a single policy period.  

D&O Policy Exclusions 

            Common exclusions in D&O policies include the fraud, dishonesty, and personal profit exclusions. These exclusions might be implicated if an insured is found to have engaged in intentional misconduct or unlawfully profited from his wrongdoing.   Oftentimes, however, such exclusions are subject to a final adverse adjudication establishing that the insured engaged in such wrongdoing. In addition, such exclusions may be "severable" such that the wrongful acts of one insured cannot be imputed to another for purposes of triggering an exclusion.

            Companies and individuals may be subject to imprisonment and/or fines for violations of the Bribery Act. As a general rule, most D&O policies do not afford coverage for fines or penalties. However, some D&O policies now afford very limited coverage for fines imposed under the FCPA. Thus, it is possible that similar coverage for limited fines or penalties might be offered for Bribery Act violations in the future.

Conclusion 

            Without a doubt, governments are demonstrating increasing intolerance of bribery in the corporate world by individuals and companies alike. To date, the Bribery Act far surpasses other anti-bribery laws, including the FCPA, in identifying the breadth of unacceptable business practices in both the private and public sectors that are subject to prosecution. U.K. enforcement authorities have emphasized the strong public policy rationale for adopting the Act's stringent measures which are designed to encourage "free and fair competition," and have outright rejected the notion of greasing the wheels of commerce by so-called facilitation payments which are considered commonplace in some parts of the world. If the rigorous enforcement and prosecution of FCPA violations in the U.S. has caused companies pause for concern, the Bribery Act might possibly signal just cause for companies to scrutinize and re-think their transnational business activities to avoid future claims, prosecution, and legal expenses for potential violations of the Act.

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On March 30, 2011, the U.K. Ministry of Justice released its long-awaited Guidance with respect to The Bribery Act of 2010, detailing the Act’s scope and jurisdictional applicability. The Guidance, which can be found here,  has quickly been criticized in some quarters for “watering down” the Act, particularly with respect to the jurisdictional scope of the Act’s commercial bribery provisions. The Serious Fraud Office’s prosecution guidance, also released on March 30, 2011, can be found here.

From the time the Act received Royal Assent, one of its features that has been the focus of particular concern has been Section 7 of the Act. Section 7 creates a new offense which can be committed by commercial organizations that fail to prevent persons associated with them from committing bribery on their behalf. Commentators have been concerned that this provision seemingly would subject any firm --even non-U.K. companies that have operations in the U.K. – to liability under the Act for violative conduct taking place any where in the world.

The newly-issued Guidance proposes a “common sense” approach to the question of applicability of this provision to firms organized outside the United Kingdom. While noting that ultimately the courts will determine whether or not a firm has a sufficient U.K. presence to warrant the Act’s application, the document goes on to say that the Act would not apply to firms that “do not have a demonstrable business presence” in the U.K.

As an example of the kinds of activities that would not be sufficient to constitute the carrying on of business in the U.K., the document states that “the mere fact that a company’s securities have been admitted to the U.K. Listing Authority and therefore admitted to trading on the London Stock Exchange” is not sufficient “to qualify that company as carrying on a business or part of a business in the U.K.

The document further specifies that merely “having a U.K. subsidiary will not, in itself, mean that a parent company is carrying on a business in the U.K.,” as “a subsidiary may act independently of its parent or other group companies.”

The primary thrust of the Guidance document is to identify procedures that companies can put in place to take advantage of the defense available under the Act, which provides that a firm cannot be held liable under the Act if it has adequate procedures in place to prevent persons associate with it from bribing.

 The document describes a principles based rather than a rules based framework, built around six guiding principles. The six principles are: proportionate procedures; top-level commitment; risk assessment; due diligence; communication; and monitoring and review.

The document also provides clarification about hospitality, stating  that “bona fide hospitality and promotional expenditures” are an “an established and important part of doing business” adding that “it is not the intention of the Act to criminalize such behavior.” The document specifically cites as example of such payments that would not typically run afoul of the Act’s provisions as “the provision of airport to hotel transfer services to facilitate an on-site visit or dining and tickets to an event.”  Introductory comments in the document from the Secretary of the State for Justice Kenneth Clarke add that “no one wants to stop firms from getting to know their clients by taking them to events like Wimbledon or the Grand Prix.”

The Act will now come in to force on July 1, 2011. The provisions in the Guidance document have been welcomed by some commentators, who note that the proportionate approach reflect in the document should be “good for business.” At the same time other commentators have criticized the guidance as having introduced “loopholes.”  Others have criticized the government for “watering down” the Act’s provisions.  

My own view is that while the Guidance has provided some clarification, it has not provided absolute clarity either, and the lack of clarity remains a concern. The examples given about what kind of activity would not be sufficient to support liability under the Act are helpful as far as they go, particularly that merely having a U.K. listing or a U.K. sub is not enough to support liability against a listed firm or the sub’s parent. Those activities are not sufficient, but what level of activity is sufficient?

The clarification that the government will be pragmatic and that the government will be guided by principles of proportionality is reassuring. However, the government’s Guidance document does not by any means put to rest all concerns. The upcoming applicability of the Bribery Act should remain an issue of focus and concern for companies with a business presence in the U.K I worry about the first non-U.K. company whose activities will become the test case under the Act.

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On February 5, 2010, BAE Systems announced (here) that it has entered separate settlements with the U.S. Department of Justice and the U.S. Serious Frauds Office, pursuant to which the company will pay a total of nearly $450 million to settle long-standing investigations of improper payments.

Under the U.S. plea deal, the company will pay $400 million to settle one charge of conspiring to make false statements and under the U.K. deal the company will pay a penalty of £30 and plead guilty to one charge of breach of duty to keep accounting stemming from a payment to a former consultant in Tanzania. A February 6, 2010 Wall Street Journal article discussing BAE’s entry into these deals can be found here.

The investigations surrounding BAE’s improper payments have been both very high-profile and very controversial. As discussed at length in a prior post (here), the most sensational aspects of the investigation have involved allegations involving the Al-Yamamah Saudi Arms deal, which allegedly involved improper payments to Prince Bandar bin Sultan, a member of the Saudi royal family. The propriety of the Serious Fraud Office’s decision to terminate that aspect of the BAE investigation was particularly controversial and eventually made its way to the House of Lords, which, as noted here, concluded that the SFO had properly exercised its authority to terminate the investigation, after a lower court had previously ruled that the SFO must reconsider its decision to terminate the investigation. The DoJ continued its investigation of the controverisal arms deal, however.

Given the controversy surrounding the BAE investigation, it is hardly surprising that, notwithstanding the sheer size of BAE’s deals resolving the investigation, questions about the resolution of the investigation have arisen.

Among others concerns that have been noted, it is very difficult to discern from BAE’s press release and from the SFO’s release (which can be found here) which exactly the company is admitting to having done. Neither document contains words or phrases you might, under the circumstances, expect to see, including, for example, "bribery" "corruption" or even "improper payments" or "improper influence." As the FCPA Professor blog notes here, "can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?"

The criminal information that the Department of Justice filed in the District Court for the District of Columbia is a little more specific, as it as least refers to improper payments that the company made in connection with military aircraft transactions involving the governments of the Czech Republic and Hungary. The criminal information also specifically references "undisclosed payments associate with the sale of Tornado Aircraft and other defense materials to the Kingdom of Saudi Arabia." The criminal information also specifically references "substantial benefits" provided to one unnamed Saudi official "who was in a position of influence" regarding the aircraft deals.

According to the FCPA Blog (here), the Al-Yamamah arms deal, about which the blog has additional information (including a link to video footage) is "at the heart" of the criminal information, though the details are slight.

The paucity of detail almost ensures that controversy will continue to surround the investigation. The tenor of the controversy is succinctly captured by the FCPA Professor blog’s comment in connection with the BAE deals that "transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today."

But though questions will continue to be raised, the sheer size of the payments BAE has agreed to make in order to resolve these investigations should not be overlooked. Along with the staggering amounts to which Siemens agreed to pay in connection with its own separate corrupt practices investigation, these payments demonstrate that corrupt practices investigations represent a very significant risk exposure. It should also not be overlooked that in the case of Siemens and BAE, as well as a number of other companies that U.S. authorities have targeted, these corrupt practices investigations often involved companies domiciled outside of the United States.

As I have previously noted (here), one parallel threat accompanying threat of regulatory investigations concerning corrupt payments is the possibility of follow-on civil litigation in U.S. courts. BAE systems was itself the target of a shareholders’ derivative suit regarding the corrupt payments investigation, although as noted here (scroll down after linking), the BAE Systems derivative suit was later dismissed due to the claimants lack of appropriate standing to bring the action.

Other foreign targets of FCPA investigations have also been subject to civil litigation in U.S. courts, as demonstrated by the recent securities lawsuit filed against Panalpina and certain of its directors and officers concerning its disclosures and accounting for certain alleged improper payments.

The point is that not only does the threat of an improper payments investigation represent a significant risk exposure for companies active in the global economy but that threat includes the risk of civil litigation in U.S. courts. This litigation threat all of these issues important considerations for purposes of D&O insurance, as I discussed in a prior post, here.

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A recent SEC enforcement action alleging Foreign Corrupt Practices Act violations against Nature’s Sunshine Products and two of its officers may represent a new and disturbing liability threat to corporate officials. The SEC asserted claims directly against the two individuals even though they were not alleged to have either involvement in or knowledge of the alleged misconduct, based solely on their "control person" responsibilities. These allegations, which experts say may represent the first of its kind to be alleged, could represent a troublesome new liability exposure for officers and directors.

The SEC’s Enforcement Action

As reflected in the SEC’s July 31, 2009 litigation release (here), the SEC filed a complaint (copy here) in the Central District of Utah against the company, alleging that in 2000 and 2001, the company had made $1 million in payments to Brazilian customs officials in order to facilitate the company’s importation of certain of its products. The complaint alleged that the company had violated the FCPA’s antibribery, books and records, and internal control provisions.

The complaint also alleges claims against Douglas Faggioli, the company’s CEO who at the time had been the company’s COO and a member of its board of directors, and against Craig D. Huff, who is no longer with the company but who served as the company’s CFO at the time.

With regard to Faggioli, the SEC alleged that his position gave him supervisory responsibility for the senior management of and policies regarding the worldwide distribution of the company’s products. The SEC alleged that Huff had supervisory responsibility for the senior management of and policies regarding the company’s books and records. Both were alleged to have failed to adequately supervise the company’s personnel in 2000 and 2001 to keep the company’s book and records accurately and to devise and maintain a system of books and records sufficient to adequately monitor company activities.

Neither the company nor the individuals admitted wrongdoing, but the company agreed to pay a civil penalty of $60,000 and the individuals each agreed to pay a civil penalty of $25,000

Discussion

According to an August 11, 2009 memorandum from the Shearman and Sterling law firm (here), the significance of the case is that control person liability allegations have "rarely (if ever) been used by the SEC in FCPA cases."

The memo also notes that the SEC did not allege that Fagiolli or Huff were involved the payments or even aware of the improper accounting for the payments. As the memo states, "the SEC’s decision to charge Faggioli and Huff with control person liability without alleging that either of them participated in or had personal knowledge of the FCPA violations raises the disturbing spectre [sic] of strict liability for executives."

In a separate interview published in the National Law Journal on August 20, 2009 (here), Philip Urofsky of Shearman and Sterling noted that at least in the civil context, control person liability "has been used against a much wider variety of corporate officers and even directors," so there is even a potential for control person allegations for FCPA violations to be raised against directors, "at least where the directors are very active and involved in the operations of the company."

The possibility that directors and officers could be held liable for FCPA violations without any culpable involvement or even knowledge of the misconduct represents a disturbing new potential liability threat to corporate officials. This threat is all the more troublesome because the SEC, under pressure to reestablish its regulatory credentials, has made it clear that FCPA enforcement will be a high priority.

Indeed, in an August 5, 2007 speech (here), Robert Khuzami, the SEC’s new Division of Enforcement head, among other things announced the formation of a new FCPA unit, saying that "more needs to be done" to enforce the FCPA. He described the unit’s goals as "being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations."

There is no private right of action under the FCPA itself. However, civil litigants have long relied control person liability allegations in claims against corporate officials. Whether these civil litigants can use these theories of control person liability for FCPA violations remains to be seen, although that seems unlikely give the absence of private right of action for FCPA violations.

However, as I have frequently noted (most recently here), one of the exposures facing corporate officials related to FCPA enforcement activity is the possibility of follow-on civil litigation – indeed, Nature’s Sunshine Products is itself the subject of a securities class action lawsuit in which investors have alleged that the company and certain of its directors and officers made misrepresentations about the company’s internal controls and financial statements as a result of the overseas FCPA violations. As discussed here, the case previously survived the defendants’ motion to dismiss.

To the extent corporate officials are held liable by the SEC for FCPA violations on control person liability theories, they could also potentially be susceptible to claims by private litigants based on alleged fiduciary duty breaches. In addition, other civil claims, including claims based on alleged violations of disclosure duties under the securities laws, could be bolstered by an SEC enforcement action alleging control person liability claims.

In short, these developments may represent a significant new area of D&O liability exposure, or at least a significant extension of previously existing exposures. The typical D&O liability insurance policy would not likely cover any fines or penalties imposed on corporate officials for their control person liability, but their expenses incurred in defending against the claims likely would be covered under the typical policy, as would their defense expenses and any settlements or judgments against them in any follow-on civil litigation. Because of these possibilities, these developments potentially could represent a significant new loss exposure for the D&O insurers, too – or at least an expansion of a previously existing exposure.

One final note is that there seems to be a disturbing new trend where the SEC is seeking to use its authority to impose liability on or to effect recoveries upon corporate officials even where the individuals themselves are not alleged to have engaged in culpable misconduct. As I noted here, the SEC recently took steps to try to clawback executive compensation form the CEO of CSK Auto even though he was not alleged to have any knowledge or involvement in the events that required the company to restate its previously issued financial statements. In the Nature’s Sunshine Products case, the SEC sought to impose control person liability on the two individual defendants despite their lack of culpable participation in or awareness of the FCPA violations.

I recognize that the SEC is under pressure to show that it is tough and that it is a trustworthy regulatory guardian, but I find this new willingness to try to impose liability on individuals who are not themselves alleged to have engaged in culpable misconduct troubling. I recognize the theoretical appeal of a "captain of the ship" type approach to corporate misconduct, but I still think individuals without culpable participation in or even awareness of misconduct ought not to be subject to the burden, humiliation and expense of governmental enforcement activity. The pursuit of persons lacking culpability seems to me like the essence of overzealous regulatory action.

That said, I note that the law firm memo linked about does recite certain background features of the Nature’s Sunshine Product case that may go a long way toward explaining why the SEC sought to impose control person liability in this particular case. It is entirely possible that the claims asserted are simply a reflection of the facts involved, and nothing more.

Special thanks to the several readers who sent me links regarding the Nature's Sunshine Products case.

Has Global Financial Turmoil Increased FCPA Risks?: The FCPA prohibits corruptly offering or providing anything of value to "foreign officials." As a result of the global financial crisis, government ownership in a wide variety of enterprises has proliferated. According to an August 10, 2009 New York Law Journal article by Stephanie Melzer and Christopher Tierney of the Cadwalader law firm entitled "Has Economic Uncertainty Expanded the Reach of the Foreign Corrupt Practices Act?" (here), the number of "foreign officials" may have dramatically increased, in ways that could have transformed long-established business practices into conduct violative of the FCPA.

The authors show that the published guidance and case law resources do not really establish conclusively what level of governmental involvement or ownership in an enterprise is required in order for an entity’s representative to be a "foreign official." Various settlements do show that U.S. authorities have been willing to extend the FCPA to "conduct involving payments to employees of entities that are less than majority-owned or controlled by foreign governments."

Accordingly, the authors conclude that given the massive amounts that governments have injected in a wide variety of enterprises, "a legitimate question arises whether employees of previously private enterprises will be viewed as ‘foreign officials’ under the FCPA." In short, "the current financial crisis may have turned some previously private employees into ‘foreign officials.’" – creating the unsettling possibility that previously acceptable and appropriate business entertainment or other ordinary business activities could now be alleged to constitute conduct violative of the FCPA.

Does FCPA Enforcement Encourage Corruption?: It may sound counterintuitive, but a recent paper (here) by attorney and scholar Andy Spaulding suggests that among the "unintended consequences" of aggressive FCPA enforcement may be that it could cause corruption to proliferate unimpeded in emerging markets.

As reflected in an August 5, 2009 Wall Street Journal article discussing Spaulding’s paper (here), Spaulding contends that FCPA enforcement might be deterring corporations from investing in developing countries where corruption is rampant. But if U.S. corporations stop investing in emerging markets, entities from other nations that are not as committed to fighting corruption will step in. As Spaulding puts it, "’black knights’ will move in to fill the void," as a result of which "the world economy could slowly begin to bifurcate into two economies: one in which bribery is tolerated and one in which it is not."

Spaulding concludes that "the FCPA is thus revealed to be a large-scale study in the law of unintended consequences."

Portrait of a Corrupt Society: An August 22, 2003 Wall Street Journal article entitled "Pride and Power" (here), about the current political and economic conditions in Russia, reported the following about the culture of corruption in that country:

One of the major obstacles to conducting business in Russia is the all-pervasive corruption. Because the government plays such an immense role in the country's economy, controlling some of its most important sectors, little can be done without bribing officials. A recent survey by Russia's Ministry of the Interior revealed, without any apparent embarrassment, that the average amount of a bribe this year has nearly tripled compared to the previous year, amounting to more than 27,000 rubles or nearly $1,000.

And Finally: For those readers who like me are fascinated with these emerging FCPA-related issues, The FCPA Blog is an absolutely essential daily read. The blog’s author, Richard Cassin, regularly updates the key developments in anticorruption activities around the globe. For example, Cassin’s take on Spaulding’s provocative paper about the FCPA’s unintended consequences can be found here.

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For some time, I have been asserting (refer here, for example) that increasing levels of Foreign Corrupt Practices Act enforcement activity represents an important development in the world of D&O insurance. During a conversation at the American Bar Association Annual Meeting in Chicago this past week, a senior claims executive from one of the leading D&O insurers expressed skepticism to me on this topic, essentially suggesting that D&O insurance doesn’t have anything to do with FCPA enforcement.

It is certainly true that fines and penalties imposed as a result of an FCPA violation would not be covered under the typical D&O insurance policy. But in many instances, defense costs incurred in defending against the enforcement action, which could be quite substantial, are likely to be covered under many D&O policies, so even just to that extent, increased FCPA enforcement activity could represent a significant D&O insurance development.

But perhaps even more significant for D&O insurance purposes than expenses incurred in defense of the enforcement activity itself is the exposure presented by the possibility of a follow-on civil lawsuit. As I have previously noted (most recently here), a separate civil action by shareholders or others is an increasingly frequent accompaniment of the FCPA enforcement activity. A recently filed case provides the latest example of this phenomenon.

On July 23, 2009, investors in Panalpina World Transport (Holding) Ltd. filed a securities lawsuit in the Southern District of Texas against the company, certain of its current and former directors and officers, and the foundation that owned the company prior to its September 2005 IPO. The investors’ complaint can be found here.

Panalpina is a Swiss company which the complaint alleges has "substantial operations in the Southern District of Texas." The complaint describes the company as "the market leader in freight forwarding services for the oil and gas industry." The complaint alleges that the company "concealed" that its Nigerian operations "depended on bribes to customs agents in Nigeria," in violation of the FCPA. The complaint further alleges that in its public reports the company "has essentially conceded its violations of the FCPA."

The complaint further alleges that when the illegal practices were revealed, the company "was forced to cease them," and its financial results and share price were "materially and negatively impacted." The complaint alleges that since disclosing its illegal activities in Nigeria on July 24, 2007, and subsequent disclosures regarding the material impact of the Nigerian business, the company’s common stock has lost over 78% of its value.

The complaint alleges violations of the Sections 10(b) and 20 of the Securities Act; Common Law Fraud; Aiding and Abetting Common Law Fraud; and Negligent Misrepresentation.

There are several interesting things about this new complaint. First, the case is an example of the ways in which FCPA-related activity can result in, for example, securities litigation against a company and its directors and officers. Subject to the terms and conditions of the applicable coverage, the expense of defending this kind of claim, as well as any subsequent settlement or judgment, would likely by covered by the typical D&O insurance policy. This case is just the latest example of how the growing FCPA enforcement activity represents a significant development from a D&O claims perspective.

But there are other interesting aspects of this suit, separate and apart form this primary consideration. Among other things, the complaint does not appear to be brought as a class action lawsuit. Rather, the action appears to have been brought solely on behalf of four apparently related investment partnerships, based in Connecticut and in the Cayman Islands.

The absence of class action allegations could be due to the fact that though Panalpina is a publicly traded company, its shares do not trade on any U.S. exchanges. (Its publicly traded shares trade only on the Swiss Exchange.) As a foreign domiciled company whose shares trade only on a foreign exchange, many of its shareholders likely are also domiciled outside the U.S., and so an action on behalf of a class of Panalpina shareholders could present a classic example of the f-cubed claimant problem (that is, foreign investors who bought their shares in a foreign company on a foreign exchange). Though the named plaintiffs include at least on foreign domiciled fund, several of the named plaintiffs are based in Connecticut and thus to that extent the f-cubed problem may be averted.

There may yet be some interesting jurisdictional questions in this case. Not only is the company foreign domiciled, and not only are its shares traded elsewhere, but the supposed bribery took place outside the U.S. And, without plumbing the depths of the factual allegations, it would seem that many of the alleged misrepresentations took place outside the U.S., notwithstanding the fact that the company may have substantial U.S. operations. The case seems to present circumstances quite analogous to the facts involved in the securities suit against National Australia Bank case (refer here), in which the Second Circuit ultimately concluded that the U.S. courts lacked subject jurisdiction over the matter.

Jurisdictional issues notwithstanding, this case in and of itself represents yet another example of a recurring phenomenon, one that I think will continue to gain importance in the months ahead, as a result of increasing FCPA enforcement activity.

The latest information regarding the increasing levels of FCPA enforcement can be found here.

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From this week’s news, it almost appears as if there had been some kind of an unannounced competition for most outrageously fraudulent or corrupt scheme. First, there was Marc Dreier’s incredibly brazen plot to peddle bogus notes to hedge funds using assumed identities. Then there was Illinois Governor Rod Blagojevich’s apparent attempt to flog Barrack Obama’s vacant Senate seat for personal enrichment. And finally there was New York financier Bernard Madoff’s massive Ponzi scheme, which may have taken investors for as much as $50 billion.  

The scale of the corruption and deception involved in these schemes is almost incomprehensible. It could be said of the three perpetrators of each of these scandals, as Time Magazine said (here) of Blagojevich, he is “either delusional, stupid or some combination of both.” But as astonishing as these developments may all be, they really don’t represent anything new.

Buried underneath the week’s headlines were the latest developments in an older but equally unsavory tale, which may serve as a reminder that there is, regrettably, nothing new about massive schemes of deception and corruption.

According to a December 12, 2008 Bloomberg article entitled “Siemens Agrees to Pay Fine to Settle Bribery Charges” (here), Siemens AG has agreed to plead guilty to Foreign Corrupt Practices Act violations and pay $800 million to settle U.S. charges that it paid $1.36 billion in bribes to government officials in at least a dozen countries.

The FCPA Blog (here) has an extensive review of the charges against Siemens, as well as links to the supporting documents, including the criminal information filed against Siemens and the DoJ’s sentencing memorandum. As the FCPA Blog puts it, the criminal charging documents detail “years of systematic and intentional violations of the internal controls and books and records provisions. It's a story of fraud, deceit and concealment -- filled with phony contracts, fake invoices, slush funds, and a boardroom feigning ignorance. “

A hearing on the deal under which Siemens would pay a $450 million fine and forfeit $350 million in profits will take place on December 15. If accepted, the penalty would be by far the largest FCPA penalty ever, far eclipsing the prior record payment of $44 million in the Baker Hughes case (about which refer here).

The Siemens case is a reminder that, as startling as this past week’s revelations have been, there is nothing new about fraudulent schemes or deceptive behavior. In the timeless words of the Book of Ecclesiastes (here), “What has been will be again, what has been done will be done again; there is nothing new under the sun.”

Next Up: The Litigation: One inevitable byproduct of the developments like those of the past week is litigation, and so it comes as no surprise that a lawsuit against Bernard Madoff and his firm has already emerged.

On December 12, 2008, an investor initiated a purported securities class action lawsuit in the Eastern District of New York against Madoff and his firm (BMIS), on behalf of “all persons and entities who purchased securities sold by or through” Madoff and his firm, “from the early formation of BMIS in the 1960s until December 12, 2008.” Refer here for news coverage of the lawsuit.

The complaint (reproduced below) alleges that its claims arise “from one of the most damaging Ponzi schemes in the history of Wall Street and the United States,” and that the defendants “swindled investors out of monies estimated to exceed $50 billion.” The complaint alleges breaches of the federal securities laws, civil RICO violations, and related state and common law violations.

Meanwhile, other plaintiffs’ firms have announced (for example, here) that they are investigating the alleged “massive fraud.” UPDATE: Please refer here to access my regularly updated list of all Madoff investor litigation, including in particular "feeder fund" lawsuits.

The filing of this lawsuit may not be surprising, and there may be further litigation yet to come. As detailed in the lead story in the December 13, 2008 Wall Street Journal (here), the victims of Madoff’s scheme include a host of institutional investors, hedge funds, and funds of funds. It may well be that these entities’ investors, eager to recoup losses as well as to assign blame, will also file lawsuits in a daisy-chain of litigation based on the Madoff firm’s collapse.

Hat tip to the Dealbook blog (here) for the text of the Madoff class action complaint, which can be viewed here:

Class Action Lawsuit Against Madoff

Another Friday Night Special: December 12, 2008 was a Friday, and that can only mean one thing – after the close of business, the FDIC announced another round of bank closures.

First, the FDIC announced (here) that state banking regulators had closed, and the FDIC had been appointed receiver of, Haven Trust Bank of Duluth, Georgia. Next, the FDIC announced (here) that state regulators had closed, and the FDIC had been appointed receiver of, Sanderson State Bank of Sanderson, Texas.

These two closures represent, respectively, the twenty-fourth and twenty-fifth bank failures so far this year. The FDIC’s complete list of failed banks during the period October 2000 to the present can be found here. Haven Trust is the fifth Georgia bank to close this year, which represents the highest total for any one state. The Sanderson bank’s closure is the second in Texas this year.

As I have noted before (here), the pace of bank closures has accelerated as the year has progressed. Of the 25 bank closures in 2008, 21 have taken place since July 1, eight of them just since November 1. The trend certainly suggests that there will be further bank closures in the weeks and months to come. And, pertinent to the preceding discussion, there likely will also be further bank-related litigation (refer here).

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Two developments involving major European companies illustrate both the challenges and uncertain progress of global efforts to combat corruption.

First, on July 29, 2008, Siemens announced (here) that its Supervisory Board has resolved to claim damages from ten former members of the company’s Managing Board executive committee, including two former CEOs and a former CFO. The claims are “based on breaches of their organizational and supervisory duties in view of the accusations of illegal business practices and extensive bribery that occurred in the course of international business transactions and the resulting financial burdens to the company.”

The former executives will be “invited to respond to the claims before legal action is taken.” A July 30, 2008 Financial Times article describing the Siemens board action can be found here.

Second, in a July 30, 2008 opinion (here), the U.K. House of Lords overturned the April 10, 2008 ruling of the Queen’s Bench Divisional Court that the decision of the Serious Frauds Office Director to discontinue the investigation of possible corrupt activity involving BAE Systems was unlawful. (My prior post discussing the April 10 decision at length can be found here.)

The discontinued SFO investigation involved possible bribery in connection with the Al Yamamah arms contract between BAE Systems and the Saudi government. As detailed in the House of Lords opinion, the investigation proceeded despite Saudi resistance until investigators' attempt to subpoena certain Saudi account information from Swiss banks led to direct threats that the Saudis would withhold cooperation with British antiterrorism efforts. Among other things, the threats included the explicit possibility that “British lives on British streets were at risk.”

In reaching its conclusion that the SFO director properly exercised his discretion to discontinue the investigation, the senior law lord, Lord Bingham of Cornhill, wrote:

The Director was confronted by an ugly and obviously unwelcome threat. He had to decide what, if anything, he should do….The issue in these proceedings is not whether the decision was right or wrong, nor whether the Divisional Court or the House agrees with it, but whether it was a decision which the Director was lawfully entitled to make….In the opinion of the House the Director’s decision was one he was lawfully entitled to make. It may be doubted whether a responsible decision-maker would, on the facts before the Director, have decided otherwise.

Baroness Hale of Richmond added in a concurring opinion that “it is extremely distasteful that an independent public official should feel himself obliged to give way to threats of any sort….Although I wish the world were a better place where honest and conscientious public servants were not put in impossible situations such as this, I agree that his decision was lawful.”

A July 30, 2008 article in The Guardian (here) describing the House of Lords opinion quotes counsel for the SFO as saying that “the SFO director was convinced that Saudi Arabia wasn’t bluffing.”

These significant developments have important implications both for companies and for continuing efforts to enforce anticorruption provisions.

First, the decision of the Siemens Supervisory board to pursue claims against the company’s former officials underscores the growing threat, which I have discussed at length in prior posts (most recently here), of follow-on civil litigation arising out of anticorruption enforcement activity. Although Siemens officials already are the target of a shareholders’ derivative lawsuit in the U.S., the Supervisory Board’s decision to take up claims against the former officials highlights the potential seriousness of the civil litigation threat.

The House of Lords decision also has great significance and represents an outcome that can only be regretted. To be sure, if it is assumed that the Saudi threats were serious (that is, if they were in fact not bluffing) then the threat to British lives justifies the decision to discontinue the investigation as well as the House of Lords opinion. Nevertheless, the capitulation to a threat of this kind represents a subordination of the rule of law to forces of a kind and character that should have no role in free societies.

The BAE Systems case clearly tested the limits of what any government might be willing to risk in resisting corruption. The implication of the decision to terminate the investigation is that if corrupt forces are sufficiently rich and powerful, they have nothing to fear from the force of law, and that anticorruption laws are enforceable only against those too weak or powerless to resist.

In its June 2008 Progress Report (which I discuss here), Transparency International noted that antibribery enforcement is “critical in draining the supply of bribe money that distorts public decision making in some of the world’s poorest states, with disastrous consequences for the decision making.” The outcome of the BAE Systems case suggests that it is not only in the world’s poorest countries that corrupt activity disrupts the processes of an ordered society.

The FCPA Blog has a post discussing the House of Lords opinion here. The FCPA Blog notes that the U.S authorities are continuing their investigation of the BAE Systems sales to Saudi Arabia.

Finally, and to bring this discussion full circle, the BAE Systems investigation is also the subject of follow on civil litigation, as discussed at greater length here.

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The growing importance of global anticorruption enforcement efforts was underscored this past week by the revelation of a cross-border investigation involving the French industrial giant Alstom and by developments in the continuing investigation involving Siemens. Moreover, the Siemens developments highlight the increasing significance of liabilities arising from anticorruption exposures for the D&O insurance industry.

First, in a May 6, 2008 article entitled “French Firm Scrutinized in Global Bribe Probe” (here), the Wall Street Journal reported that French and Swiss authorities are investigating whether officials acting on behalf of Alstom paid hundreds of millions of dollars between 1995 and 2003 to win contracts in Brazil, Venezuela, Singapore and Indonesia.

Then on May 9, 2008, German prosecutors announced that they will pursue a civil enforcement action against former Siemens chairman Heinrich von Pierer and several other (unnamed) former Siemens board members. (Refer here for background regarding the Siemens investigation). von Pierer served as Siemens’ chief executive from 1992 to 2005, and as its Chairman until April 2007. Prosecutors apparently have elected for the time at least not to pursue criminal charges against von Pierer.

According to a May 10, 2008 Wall Street Journal article (here), the company itself has also said that “it may seek financial compensation from former managers but didn’t name individuals.”

According to the Journal article about the Alstom investigation, the Alstom and Siemens investigations “suggest that Europe’s prosecutors have begun taking a tougher line on business practices that their U.S. counterparts have long treated as criminal.” It is not merely coincidental that these investigations are now emerging; they are in fact an outgrowth of relatively recent changes in the laws of both Germany and France.

For many years, under the laws of the two countries, corrupt payments were not only legal, but the amount of the payments were tax deductible. But both countries are signatories to the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions. To implement the Convention, in 1999 Germany passed the German International Bribery Act. According to the Journal, “France outlawed bribery of foreign officials in July 2000.”

Both companies seem to have had difficulties adapting to the new legal prohibitions, as the conduct under investigation both preceded and followed the enactment of the new laws.

One particularly interesting aspect of the Alstom investigation is the way that the circumstances under review came to light. The investigation apparently arose as a result of an audit commissioned by the Swiss Federal Banking Commission of Tempus Privatbank AG, a small private bank. The audit uncovered documents concerning Alstom-related transactions that detailed the flow of about 20 million euros from Alstom to shell companies in Switzerland and Lichtenstein.

These investigations underscore the growing significance of cross-border anticorruption actions and highlight the fact that anticorruption efforts are no longer just a U.S. priority. Moreover, the potential exposures and liabilities are enormous. Siemens itself has already paid a fine of 201 mm euros.

There are also important implications arising from Siemens’ suggestion that it may pursue claims against its former managers. According to a May 5, 2008 Business Insurance article entitled “German Insurers Brace for Siemens Claim” (here), the company has notified its D&O insurers that it intends to file a claim under its D&O policies relating to the company’s antibribery related exposures. The article reports that the company carries D&O limits of 250 million euros. The article does not detail the specifics of the insurance claim or the matters for which the company claims or intends to claim coverage, so there is no way to assess the likelihood of the company’s eventual recovery under the policies.

It is far from certain that the company’s policies would actually cover the claimed amounts. But to the extent the policy’s limit is exhausted by the claims for coverage, it could, at least according to the Business Insurance article, have a substantial impact on the German market for D&O insurance.

The potential insurance implications from the developments in the Siemens investigation demonstrate the growing significance for the D&O insurance industry of the liabilities arising from anticorruption enforcement activity. As investigations like those involving Alstom and Siemens emerge and develop, and as litigation like that involving Alcoa (about which refer here) continues to arise, these issues necessarily will become a significant priority for companies and for D&O insurers. As I have previously suggested (here), anticorruption violations may well represent the “next corporate scandal.”

The May 9, 2008 Financial Times has an interesting editorial about the Alstom investigation and the expansion of anticorruption efforts, here.

Speakers’ Corner: On May 14, 2008, I will be speaking at the American Conference Institute’s D&O Liability Insurance Conference (refer to the agenda, here). I will be participating on a panel with my good friend Dan Bailey in a session entitled “Emerging Exposures Roundup: Fiduciary Litigation, Global Warming and More.”

Then on May 15, 2008, I will be in Toronto to participate in the Professional Liability Underwriting Society (PLUS) Canadian Chapter’s educational event regarding the subprime crisis. Information about the Toronto event can be found here. The other panelists include Dr. Arturo Cifuentes of R.W. Pressprich & Co., Denis Durand of Jarislowski Fraser, and Robert Murray of Chubb.

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In a powerful affirmation of the rule of law, two justices of the U.K.’s High Court of Justice ruled in an April 10, 2008 opinion (here) that the British Serious Fraud Office (SFO) must reconsider its decision to discontinue its bribery investigation into the award of a weapons contract between Saudi Arabia and BAE Systems plc. My prior post regarding the BAE investigation can be found here.

The SFO announced its decision to discontinue the investigation in December 14, 2006. The investigation had been ongoing for some time and had even withstood a prior attempt in October 2005 to have the investigation stopped. However, in July 2006, apparently when the SFO was about to obtain access to certain Swiss bank accounts, the British government received “an explicit threat made with the intent of halting the investigation.”

In the proceedings before the court, the government refused to characterize the threat, but the opinion quotes news reports that what happened was that Prince Bandar bin Sultan bin Abdul Aziz of al-Saud “went to Number 10” and told the Prime Minister’s Chief of Staff to “get it stopped” or the military weapons contract ‘was going to be stopped and intelligence and diplomatic relations would be pulled.” (Prince Bandar, the Saudi ambassador to the United States from 1983 to 2005, is now and in 2006 was the Secretary-General of the Saudi National Security Council.)

Following the July 2006 threat, an internal governmental review process unfolded, including high level consultations with the British ambassador to Saudi Arabia and others, culminating in a previously confidential December 8, 2006 memorandum by then-Prime Minister Tony Blair to his Attorney General Peter Goldsmith that “developments” had “given rise to the real and immediate risk of the collapse of UK/Saudi security, intelligence and diplomatic cooperation.” This, the Prime Minister said, would “have seriously negative consequences for the UK public interest in terms of both national security and our highest priority foreign policy objectives in the Middle East.” The government was particularly concerned with the Saudis continued counter-terrorism support, without which, it was feared, British lives could be in danger.

According to news reports (here), in August 2006 (that is, one month after Prince Bandar’s visit to “Number 10”), BAE won a $8.7 billion order from the Saudi government for 72 Eurofighter Typhoon warplanes, purportedly the latest component of the Al Yamamah arms deal, which dates back to 1985 and is the largest British export contract ever.  

The legal challenge to the decision to terminate the investigation was presented by two public interest groups, Corner House Research and the Campaign Against Arms Trade. They challenged the SFO’s decision to accede to the threat as “contrary to the constitutional principle of the rule of law,” as well as on other grounds. By contrast, the government argued, as the court summarized, that “the law is powerless to resist the specific, and as it turns out, successful attempt by a foreign government to pervert the course of justice in the United Kingdom.” (The court said of this argument that “so bleak a picture of the impotence of the law invites at least dismay, if not outrage.”)

The April 10 opinion was written by Lord Justice Alan Moses. After a detailed review of the background to the SFO’s decision to terminate the investigation, the Court considered the claimants’ challenge, which Lord Justice Moses said did not question the government’s assessment of the national security risk. The threat that was the basis of the decision to terminate the investigation “was not simply directed at the company’s commercial, diplomatic and security interests, it was aimed at its legal system.”

The threat was made “with the specific intention of interfering with the course of the investigation.” The court noted that “had such a threat been made by one who was the subject of the criminal law of this country, he would risk being charged with an attempt to pervert the course of justice.” Surrender to such threats “merely encourages those with power, in a position of strategic and political importance, to repeat such threats.” The court concluded that “in yielding to the threat, the [SFO director] ceased to exercise the power to make the independent judgment conferred on him by Parliament.” As a result, the court concluded that the submission to the threat was “unlawful.”

The court’s opinion reviews a host of other considerations, including in particular the U.K’s obligations as a signatory Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (which specifies that investigations “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”). But the court’s essential conclusion is that the decision to terminate the investigation was contrary to the principles of the rule of law. “It is difficult,” the court said,” to identify any integrity on the role of the courts to uphold the rule of law if the courts are to abdicate in response to a threat from a foreign power.”

The full opinion is lengthy but it is well worth the read. The details surrounding the government’s consideration of how to respond to the threat are fascinating, and the court’s analysis of the legal considerations involved is thought-provoking, particularly its consideration of how imminent a threat of loss of life must be before a court might consider yielding. The inherent tension in the court’s decision arises from the fact that this case tests the limits of what any government might be willing to risk in resisting corruption; the lesson the court rejected is that if the corrupt forces are rich and powerful enough, they have nothing to fear from the force of law.

It remains to be seen, however, whether the investigation will go forward in the end; the court did not rule that the investigation must proceed, only that the December 2006 decision to terminate the investigation was unlawful. According to an April 11, 2008 article in The Guardian (here), “the high court will reconvene in a fortnight to decide what remedy to award the two groups of anti-corruption campaigners who brought the judicial review of the Serious Fraud Office decision to end the inquiry.”

As I have noted in a number of prior posts, most recently here, many governments around the world (including the U.S. government) are increasingly committed to enforcing anti-corruption laws. BAE is also being investigated in the U.S. and in Switzerland, and is only one of several current high-profile corruption investigations. The April 10 opinion underscores the seriousness of the issues involved, as well as the stakes. Courts will continue to grapple with the challenges these cases present, but it is important for companies to understand that the risks involved with corrupt practices include the threat of civil litigation, as I discussed here. BEA is in fact already the target of a shareholders’ derivative lawsuit in the United States. The growing threat of this type of litigation suggests why corrupt activity may represent the “next corporate scandal.”

Press coverage of the April 10 decision can be found here and here. The FCPA Blog’s post on the decision can be found here.

Subprime Litigation Webcast: On Friday April 11, 2008, at 11:00 a.m., I will be a panelist on a webcast sponsored by Risk Metrics on the topic “Subprime Litigation and Liability.” The panel will be moderated by Adam Savett, author of the Securities Litigation Watch blog, and will include defense attorney Darryl Rains, of the Morrison and Foerester firm, and plaintiffs’ attorney Mark Lebovitch, of the firm Bernstein, Litowits, Berger & Grossman. Registration for the webcast (which is free) can be accessed here. Further information, including links to background papers by Risk Metrics, can be accessed on the Securities Litigation Watch, here.  

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